Question:
In the diagram below, OY1 is the equilibrium level of national income and OY* is the full employment level of national income. What is the deflationary gap of this economy?
(1) YU
(2) UV
(3) KV
(4) MV
(5) Y1Y
Correct Answer:
(2)
Answer Explanation:
A deflationary gap is measured as the vertical shortfall in Aggregate Expenditure (AE) required to achieve full employment. Looking at the full employment vertical line (Y*), the required expenditure to reach the 45-degree line is at point U. The actual current expenditure curve is below it at point V. The vertical gap is the distance UV.
Topic: Macroeconomic Equilibrium Year: 2018
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